chapter  9
20 Pages


In these two sentences George Richardson set out the agenda for what has come to be called the capabilities theory of the firm. It is a theory which seeks to explain what any particular firm does by what its decision-makers believe that they know, what they believe they have learnt, and what they believe they can now do; that seeks to explain the evolution of a firm's activities by the evolution of its knowledge and skills, which is the result in part of deliberate efforts to guide that evolution, and in part of the unintended consequences of its actions; and that pays particular attention to the firm's internal arrangements and patterns of behaviour and also to its connections with other firms - but does not attempt to explain these features entirely by their implications for transaction costs. That is a broad agenda; and in this chapter I propose to explore the concept of capabilities. The concept is not well defined, and my primary purpose is to improve the definition.